Global Credit Ratings has accorded the above credit rating(s) on ARM Cement Limited based on the following key criteria:
The rating takes cognisance of ARM’s well-entrenched position within the East African cement industry, underpinned by strategic limestone reserves and extensive capacity building in recent years. The completion of 3 plants in Kenya and Tanzania in the 3 years to F12, together with enhanced productivity, has engendered robust top line growth and profitability. ARM’s aggressive expansion (which cost KShs13.9bn over the review period) heightened operational and investment risk, necessitating markedly higher debt levels. Net gearing and net debt to EBITDA therefore remain elevated, at a respective 180% and 467% as at FYE12. Positively, the capex drive is almost complete, and will see capacity nearly double to 2.6 million tonnes per annum, while ensuring that ARM has self-sufficiency in clinker production. With no major capital formation planned until this capacity is bedded down, debt levels are projected to begin to decline notably from F14. This is expected to underline robust medium term earnings and sound medium term debt serviceability metrics.
Financial flexibility was enhanced by a US$50m AFC convertible loan raised in F12. Its anticipated conversion to equity over the medium term (at the creditor’s option) should see a material reduction in gearing. Despite strong cash generation, sizeable working capital pressures and the large capex spend have seen ARM retain very little cash over the review period. Operations remain considerably working capital intensive, with sizeable absorptions expected in line with ramped up capacity. As such, discretionary cash flows are likely to be constrained going forward.
Overall, the substantial infrastructure deficit in the region and strong fixed capital formation enhance industry prospects. Cognisance is nonetheless taken of challenges deriving from capital constraints, inflationary pressures, high transportation costs and inadequate power supply. In addition, the planned ramp up of capacity in East Africa will elevate competitive pressures, especially given the industry’s low product differentiation.
An upward rating movement could result from the conversion of the AFC loan to equity, which would significantly reduce gearing. In addition, the successful bedding down of the expansion programme and a demonstrated robust earnings trajectory would be positively viewed. However, delays in critical regional infrastructure spend could curtail demand for cement, increasing pricing pressures. Substantial capex spend, or unanticipated working capital pressures over the medium term may place additional strain on gearing, driving a deterioration in ARM’s credit profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Oct/2001)|
|Long term: BBB(KE); Short term: A3(KE)|
|Last rating (Jul/2012)|
|Long term: A(KE); Short term: A1(KE)|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ARM Cement Limited participated in the rating process via face-to-face management meetings, teleconferences and written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to ARM Cement Limited with no contestation of the rating.
The information received from ARM Cement Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), full year budgeted financial statements, most recent year to date management accounts , corporate governance and risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.